From time to time, cryptocurrencies experience a drop in value, for a wide array of different reasons. Of course, this is a great time to invest in these, but this is not the only thing we can do. It is a perfect chance to study the potential risks of making this sort of investment. There is practically no person out there who is not aware of the market’s volatility. It represents both a blessing and a curse to investors and traders.
These big swings usually take us by surprise. To predict at least some of them, you should always follow the latest trends in the market. Not to mention that you should opt for a reliable exchange, where you can make smart moves. If you want to check one of these, be sure to click here. Now, we would like to talk about how you should calculate the return-on-investment of those you’ve made in this market.
Let’s see what we know about this process.
What is ROI?
Return-on-investment, or ROI, is one of the ways you can evaluate the performance of the asset on a certain market. As everyone knows, the whole point of every market is to purchase an asset for a low price and sell it for a higher price. When you know that, you will perfectly understand that ROI is a perfect way to determine whether your strategy is effective or not. If the effectiveness is not on an appropriate level, you will need to make some changes.
Even though we are talking about an efficient method to see whether your strategy is effective or not, that doesn’t mean that this is a complex thing to understand. For instance, when you compare it to some other methods out there, it certainly doesn’t have an insight into too many elements. Overall, you will take a look previous value of an asset you have invested in, and how it has performed over time.
Sure, ROI is important, but this is not the only factor you should take into consideration when making these calculations. Not to mention that having this is not the only element you should base your strategy on. Still, you cannot do without it, especially if you want to take a look at previous values of the assets you have invested in, no matter what market we are talking about.
How is it Calculated in Crypto Market?
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Calculating ROI in the cryptocurrency market is somewhat more complex than in the majority of other ones. For instance, if you have purchased 100 USD Coin for $100. Now, let’s say that the value has increased to $1.7, then it is obvious that ROI is 0.70, which represents 70%. However, it’s not possible to take this percentage as the overall efficiency in every situation. The reason is that some cryptocurrencies require more time to experience a price rise.
BTC Overall ROI
We know that BTC is the oldest and most valuable cryptocurrency out there. It was launched back in 2009. Over time, it has reached a significant value, more than any other digital currency out there. So, it would be great to take a look at its value, from 2009 to 2024, and see its overall ROI. Let’s take a look at it. For example, if you invested $100 in BTC in 2011, you would now have slightly more than $4 million. Sure, it is clear that some other crypto out there has similar stories, but they are not nearly as successful as BTC.
Potential Limitations
We’ve already stated that ROI is not the only factor you should take into consideration. The reason for that is that this element has many limitations since it doesn’t include some important aspects. Besides that, we are talking about the market that has some specific features that are simply not present in some other ones, due to the massive risks that can happen as a result of volatility.
1. Valuation
Evaluating the investment is somewhat problematic for those who want to sell their cryptocurrencies. They are usually not sure whether they should look to use original value as a foundation. The reason is quite simple, other features become a part of it, like inflation, replacement costs, withdrawal fees, and deducting depreciation. So, you can see that this represents a big obstacle.
2. Venture Growth
There are two ways to ensure a high ROI is decreasing the costs to the lowest point and maximizing profits. Basically, no matter which one of these approaches you choose, there are some negative effects you can expect to happen. For example, if you decided to minimize the costs, chances are that the business will simply not perform as effectively as before. At the same time, maximizing profits can increase costs in the long run.
3. Time is Not Included
Now, we want to take about the time factor in greater detail. Without it, you will not have a proper idea about the investment’s performance. For example, if you wait for five years before you sell digital currencies, chances are that this is not the best time to do it, even though the value may be at its highest. There are many reasons for this opinion. One of these is that maybe the withdrawal fees were lower previously.
4. Higher Risks
It makes perfect sense to presume that assets that offer higher ROI come with much higher risks. If you’re not prepared to purchase an asset that doesn’t have high volatility, then you cannot expect to receive more profit. On the cryptocurrency market, pretty much all the options come with a high risk. It is one of the reasons why they can offer you this much profit over time.
The Bottom Line
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Being able to understand the way to evaluate your investments is a great help, especially when you make long-term ones. In this article of ours, you can take a look at how you can calculate it properly, without making any mistakes in the process. We are certain you will find this sort of insight useful.
